Lockheed Reaches Pentagon Agreement for 32 More F-35s

Lockheed Martin Corp. and the Pentagon have reached an “agreement in principle” to complete the contract for the fifth production batch of F-35 fighters for as much as $4 billion, according to two officials familiar with the negotiations. Source: Lockheed Martin Corp. via Bloomberg

Nov. 30 (Bloomberg) -- Lockheed Martin Corp. and the
Pentagon have reached an “agreement in principle” to complete
a contract valued at as much as $4 billion for the fifth
production batch of F-35 fighters, according to the Pentagon’s
spokesman.

An accord has been reached to buy 32 fighters in addition
to the 63 already on contract, Pentagon spokesman George Little
told reporters today.

The Pentagon said in December that it would spend a maximum
of about $4 billion on the production lot. Dollar figures for
the contract won’t be available for about a week, according to
officials who spoke about the negotiations on condition of
anonymity. The contract is the second consecutive one to involve
the purchase of 32 aircraft, an indication the Pentagon assesses
the program’s manufacturing processes are on solid enough
footing to sustain that rate.

“It was a tough negotiation and we are pleased that we’ve
reached an agreement,” Little said. “It ends the year on a
positive note and sets the program to move forward.”

Signing the contract before year-end means that the dollars
obligated won’t be subject to reduction if the Pentagon is
forced to make $52.3 billion in additional cuts during the
current fiscal year under the process called sequestration.
Those cuts would begin in January unless President Barack Obama
and Congress reach agreement to avert the spending reductions
and tax increases known as the fiscal cliff.

Lockheed rose 28 cents to $93.30 at the close in New York
trading after touching $94.10, a 1.1 percent increase, during
intraday trading.

Lockheed’s Comment

“We remain committed to working with our government and
international customers, and we continue to see excellent
production performance,” Orlando Carvalho, Lockheed Martin’s
F-35 program general manager, said in a statement to be released
today. “Our top priority is to deliver the F-35’s 5th
generation capability to our U.S. and partner national
warfighters.”

Vice Admiral David Venlet, the Pentagon’s F-35 program
manager, said in the statement that the agreement is
“beneficial to the government and Lockheed Martin.” He said
“production costs are decreasing.”

Negotiations for the fifth production contract have been
under way since last year. The terms may change when a so-called
definitized contract is signed.

Under the new contract, Lockheed Martin will build 22
conventional-flight versions of the fighter for the Air Force,
seven aircraft carrier versions or the Navy and three short
takeoff-vertical landing models for the Marine Corps. The F-35
Joint Strike Fighter is the Pentagon’s costliest program.

Rising Costs

Pentagon officials have promised Congress to get tougher in
negotiations with Bethesda, Maryland-based Lockheed Martin, the
world’s largest defense contractor. The first four contracts for
63 jets are exceeding their combined target cost by $1 billion,
according to congressional auditors.

The Government Accountability Office said in its annual
report this year that the estimated average procurement cost of
each jet had risen to $137 million from the initial estimate of
$69 million in October 2001.

Negotiations involved the Pentagon’s first extensive use of
a “should-cost” analysis. It involves a detailed review of
prior F-35 contract data, historical cost data and “reasonable
extrapolations” of what the next aircraft cost should be, Frank
Kendall, the Pentagon’s chief weapons buyer, told reporters in
July.

“We started the negotiations on the government side with a
very well-documented set of costs and then we were able to
compare it to the bid we received, item-by-item, line by line,”
Kendall said. “Going through and trying to resolve the
differences has been the process that has taken so long.”

“Once we get through that we’ll be in a very good place
for negotiating future lots,” he said. “That’s what the time
has been all about. We have more information.”